About Me

greekdefaultwatch@gmail.com
Natural gas consultant by day, blogger on the Greek economy by night. Trained as an economist and political scientist. I believe in common sense and in data, and my aim is to offer insight written in language that is clear and convincing.

04 June 2006

OPEC enlargement

News has come out that OPEC is considering inviting Angola and Sudan to join its ranks. Expectedly, this has worried markets and politicians who fear anything OPEC and who believe that the cartel will be made more powerful if the two African countries join along.

But the fears are a bit exaggerated: the two producers do not add much to the cartel: in 2005, OPEC produced around 34 mbd, Angola around 1.25 mbd, and Sudan 0.36 mbd (world production was around 84 mbd). A second reason to feel less worried is that OPEC is hardly a successful cartel, especially in tight markets. To defend prices, OPEC members must bind together, but cohesion is low when prices are high. For a year now, OPEC has disbanded its quotas. In tight markets, whether Sudan and Angola are members of OPEC will not make a big difference.

It is even not clear that Angola and Sudan will want to join. Free-riding on the cartel’s actions is preferable to making production cuts oneself; this is what Mexico, Norway and Russia have done in the past. Wanting foreign investment to develop natural resources, Angola and Sudan would scare off the oil majors, fearing that their return on investment would be subject to OPEC quotas. This is no guarantee that they will not join; governments make energy policy by taking into account much more than the dollar return of their actions.

What if Angola and Sudan joined OPEC? The cartel has always split between price hawks and price moderates. Countries with low reserves take a near-term view of markets and tend to want high prices; countries with high reserves usually try to defend oil’s competitiveness and tend to advocate moderation. Sudan has medium reserves with a Reserve to Production (R/E) ratio of 57 (meaning it will run out of oil in 57 years if it maintains current production); Angola’s R/P ratio is 24 (by way of comparison: Saudi Arabia has 67, Iran 88, Iraq, Kuwait and the UAE over 100).

Reserves alone will not govern price policy; Sudan is fighting a war in Darfur, it has signed a fragile peace treaty with the South, and has major internal problems, leading it to be likely a price hawk. Angola has similar problems, trying to rebuild its infrastructure which was destroyed during years of civil war, and to alleviate its high level of poverty.

Although this may mean that both countries may favor high prices, their interest in developing resources (and their dependence on foreigners to do so) may moderate their willingness to join OPEC. But in the current markets, OPEC is not really a force to fear.